The Obama administration would do itself and our economy a great service if it brought back the office of energy czar for the purpose of making this book’s thesis a reality — and made its co-authors, Anne Korin and Gal Luft, co-czars.
Czar is not a very democratic-sounding word. It smacks of Asiatic despotism, but it finds its constitutional charge in the president’s executive prerogative. The basic idea is that it’s hard to shake up an entrenched, self-interested status quo and that our national interest sometimes is better served with someone or some few acting in an extraconstitutional capacity. This is the political sentiment behind Thomas Friedman’s “China for a Day” meme: If only the engineers were in charge and the “can’t do” forces of our aging democracy held at bay, we could build an energy future worthy of a growing, clean and safe 21st century.
A reading of “Petropoly” offers a glimpse into the promised land of what our energy future could look like if we upended our thinking. It ought to be required reading for every elected official, the ethanol lobby and all those who forecast energy markets.
According to Ms. Korin and Mr. Luft, both conservatives and liberals have a completely wrong understanding of oil and our “addiction” to it. Liberals want to put our planet on a “diet” — learning to live with less. This was the sentiment made infamous by Secretary of Energy Steven Chu, who made the mistake of speaking truthfully that the administration’s ends are well-served by high gas prices.
On the flip side, conservatives argue for increasing domestic supply — “drill baby, drill.” Unfortunately, the price of oil is set in a global market that it is manipulated by the Organization of the Petroleum Exporting Countries (OPEC) — those nice guys in the Middle East — and our friend to the south, Hugo Chavez. All the advancements in vehicle efficiency that the smartest engineers can come up with and anything new the drillers bring to market can be negated, not by the invisible hand of the market, but by OPEC’s relentless monopoly power. The authors want to take away this “veto power on global commerce.”
The authors’ answer to this problem: fuel competition that starts with engines capable of accepting a variety of fuels, especially natural gas and methanol. “Petropoly” was written with those in mind who think any solution short of supply-side is left-wing meddling or crass rent-seeking.
“Petropoly” opens with a quote from Milton Friedman, and its last chapter is titled “What would Hayek Do?” The book starts and ends with an examination of the problem of monopoly power. More important, it provides the solution.
This is not a “tilting at windmills,” blue-sky intellectual exercise disconnected from the real world. Ms. Korin and Mr. Luft’s thinking is rooted in science, economics and politics, and they display intellectual equity to other points of view that is refreshing and clarifying.
Nevertheless, they speak clearly and sharply to soft green thinking: “Invoking solar, wind and nuclear power as remedies to oil independence is like offering Prozac to a cancer patient.” They put forward two lapel-shaking developments that change everything: the Arab Spring and America’s position sitting astride what President Obama calls “the Saudi Arabia of natural gas.”
The perennial challenge for energy investment is that OPEC — sensing an up-and-coming competitor — can summarily drop the world price of oil and destroy the return on investment of any competing fuel product. Any price over $5 a barrel, and OPEC is in the black, whereas the extraction cost of Canadian tar sands is four times that.
But OPEC’s latitude for lowering the price has been circumscribed with the Arab Spring. In response to the uprisings, King Abdullah of Saudi Arabia increased his budget by $129 billion, an 83 percent increase in spending, with the other OPEC heads of state following suit.
The authors argue persuasively that the best predictor of the price of oil has been and will remain how much OPEC countries need to raise to cover their expenditures. OPEC output has been relatively flat for the past 40 years even though its member countries are sitting on 78 percent of the world reserves and global demand is up 60 percent. Barring a competitor fuel in the transportation sector, we are looking at a future of high oil prices.
“For years, the Saudis have calibrated oil prices in such a way that oil revenues are sufficient to balance their budgets and ensure cradle-to-grave services to their booming population.”
Enter the United States. During the past 10 years, it has become the Saudi Arabia of natural gas, thanks to two innovations: hydraulic fracturing and horizontal drilling. As a result of these technologies, Rust Belt states like Ohio, Pennsylvania and New York — and, farther west, North Dakota — are positioned to grow our economy, help our environment and increase our national security. The latter is particularly important in light of the sequestration cuts and a war-weary nation.